An Experiment in Economic Governance

The Planning Ministry -

January 28, 2012, 4:19 pm

By Leelananda De Silva

Economic planning fell out of fashion after 1977. From 1948 until then, when Sri Lanka was a mixed economy, there was some kind of economic planning practiced by the two leading political parties, when they were in power. Once the liberalized market economy was introduced, it was felt by the government of the day that economic planning was now outmoded. There was some confusion here. Economic planning can adjust to any political framework - socialist, mixed economy, or market economy. It is true that in Sri Lanka economic planning was associated with the mixed economy, and the failure of that economic system to sustain high growth rates cannot be attributed to economic planning.

Economic planners have to work within the political and economic policy framework of the governments in power. After 1977, it is arguable that some kind of planning of public investment would have offered higher returns than they have obtained. In this context it might be worthwhile to examine the institutional mechanisms which prevailed in the 11 years of intensive planning in this country.

The Ministry of Planning and Economic Affairs was established in 1965 and lasted until 1977, when it was merged with the Ministry of Finance. In those eleven years, the Ministry was arguably the most powerful body within the Sri Lankan machinery of government. It was powerful for several reasons - it came under the Prime Minister, who was the Minister of Planning; it controlled the capital budget; foreign aid was negotiated by and channeled through it; it received all cabinet papers, and had the right to make observations on them, which were almost binding. If there was another ministry which could rival it, it was the Ministry of Finance.

Prior to the establishment of the ministry in 1965, there were mechanisms for economic planning. From about the early 1950s there was a Department of Planning and a Planning Secretariat under the Ministry of Finance, and there were even Plans. In 1965, the Prime Minister created the new ministry as he felt that economic planning deserved a higher priority than formerly and it should therefore be placed under him. There was also a personal aspect, as the Prime Minister was anxious to have the services of Dr. Gamani Corea and to place him at the centre of national economic governance. The history of this period in relation to planning has been described in detail by Dr. Gamani Corea in his memoirs.

There were two phases in the life of the Ministry. From 1965 to 1970, the Minister was Dudley Senanayake and the Permanent Secretary was Gamani Corea. During this period, it was indeed the most powerful ministry. The Ministry of Finance, under U.B Wanninayake, played a supporting role. As a minister Wanninayake was a close colleague and a friend of the Prime Minister. There were no tensions between the two. The Prime Minister was fully engaged in the subject of planning and economic affairs and his relationship with Dr. Corea was personally and professionally close.

From 1970 – 1977, the politics was radically different from the earlier period, there being a coalition government and the Ministry of Finance being in charge of a very powerful political personality, Dr. N.M. Perera. Apart from her interest in domestic issues, Prime Minister Sirima Bandaranaike was also much concerned with foreign affairs. The Permanent Secretary, Prof. H.A. de. S. Gunasekara, was a different type of person from Dr. Corea, and his relationship with the Prime Minister was at a professional level. This was a time when there was political tension among coalition partners, and these were reflected in the relationship between the Finance and Planning Ministries. There was a continuing attempt to diminish the power and influence of the Ministry of Planning.

In 1973, these attempts led to the removal of the plan implementation function to another ministry still under the Prime Minister. The aim was to reduce the power of the Permanent Secretary. In 1970 when the new government took over, the ministry was designated as Planning and Employment and sometime later on, it was renamed the Ministry of Planning and Economic Affairs once the plan implementation function was removed. The story of those two periods in a short life provides instructive insights into the politics of economic governance.

Between 1965 and 1970, the Planning ministry was the dominant institution in the economic management triangle, which included the Ministry of Finance and the Central Bank. The three main departments of the planning ministry were the planning division, plan implementation division and the external resources division. In this early period, apart from Dr. Gamani Corea, the other officials who made a difference and wielded great influence were Godfrey Gunatilake, David Loos, Lal Jayawardene and Nihal Kappagoda.

Godfrey worked closely with Gamani in designing the ministry’s structures, and its patterns of work. He was also behind the setting of the National Operations Room, to follow up on the implementation of major projects. The ministry at this time attached high importance to getting the most out of the public investments that were being made. David Loos was primarily concerned in building up the machinery for aid negotiations including the establishment of an Aid Consortium for Ceylon, and negotiating with donors (the idea of an aid consortium was first mooted by Dr. N.M Perera, when he was Minister of Finance in 1964). Lal Jayawardene’s primary engagement was with perspective planning. Nihal Kappagoda made an important contribution in developing the concept of a foreign exchange budget. Gamani and Godfrey were two of the leading thinkers on development issues in the third world, and they were later to be leading members of the Third World Forum.

After 1970, the new government, and the new Permanent Secretary, Prof. Gunasekara looked for a reorientation of the ministry’s directions. Prof. Gunasekara aimed at a greater local footprint. While the ministry continued to control the capital and the foreign exchange budgets and foreign aid negotiations, it rapidly developed a more domestic dimension. This took two forms. One was the creation of a division to manage Divisional Development Councils (DDCs). These DDCs were to cover the country and stimulate micro- enterprises. This was not entirely successful. Another was the establishment of District Planning Officers attached to Kachcheries. This was an important innovation to bring planning to the district level. However, it came too late in the day. The ministry also created a new planning service.

An important task of the ministry in the early 1970s was to prepare a Five Year Plan. In 1971, the ILO- sponsored Dudley Seers mission visited Sri Lanka and prepared a comprehensive report on the country’s development, especially with the employment dimension in mind. The Seers Mission was commissioned by the earlier government, but it visited Sri Lanka only after the change of government. Prof. Gunasekara did not view these missions favourably as his view was that our planning should be home spun.

The Seers Mission report was one of the inputs into the preparatory process of the Five Year Plan. The Plan itself broke new ground through its emphasis on equity and social development, apart from focusing on investment and economic growth. A more inclusive approach to economic and social development was aimed at through the Five Year Plan. In preparing this plan, Godfrey Gunatillake and Ananda Meegama were the key figures. Ananda Meegama and Prof. Gunasekara were the most influential figures in this latter period of the Ministry.

There was another new development at the behest of Prime Minster Bandaranaike which added new functions to the ministry. It had a history of close engagement with bodies like UNCTAD, and these relationships were now to expand further. The Prime Minister, as Minister of Foreign Affairs, was getting deeply engaged in the Non Aligned Movement. Once the Non Aligned Summit held at Algiers in 1973 decided on Colombo as the venue for the Fifth Non Aligned Summit to be held in 1976, the Prime Minister was anxious that the economic aspects of Non Alignment, in particular the ongoing North- South debate between developed and developing countries be reflected in the discussions and conclusions of the fifth summit.

The Prime Minister also saw that one of the ways in which the Non Aligned Summit could be made relevant to a domestic audience was by a greater focus on economic issues that mattered to Sri Lanka. She wanted the Division of Economic Affairs in the Ministry of Planning to be engaged in the preparations for the Non Aligned Summit and deal with the economic issues alongside the Ministry of Foreign Affairs. As a result, from 1973 to 1977, the Division of Economic Affairs was heavily engaged in international economic relations at the United Nations and in Non- Aligned and North- South forums.

The political coalition which governed the country from 1970 broke up in 1975. Once this happened, there was a new finance minister, Felix Dias Bandaranaike. In the next two years, the ministries of Planning and Finance acted together, and Prof. Gunasekara was once again a highly influential figure working closely with the Minister of Finance at a time when the Prime Minister’s attentions were more on foreign affairs. Two instances of this close relationship between the two ministries come to mind. The Monetary Law Act was amended by the Minister of Finance to include the Permanent Secretary of the Ministry of Planning on the Monetary Board of the Central Bank, increasing its number of members from three to four. The Minister of Finance and Prof. Gunasekara also worked closely to revalue the Sri Lankan rupee, against the advice of the Central Bank.

In the 1970s, the Planning Ministry in some respects could be seen as a department of the Prime Minister. The Prime Minister assigned to it many tasks, which were not strictly planning functions. One of those tasks was to negotiate terms of compensation for sterling company estates, with their previous owners. Another was to service the cabinet committee on the Brain Drain. The ministry organized the annual sessions of ECAFE (now ESCAP) in Colombo in 1974, this being the first major international conference n Sri Lanka and held at the new BMICH. There were many others of this kind. The Prime Minister utilized the ministry to assist her in managing cabinet affairs.

A curious feature of two of the key changes in the machinery of government in 1965 and 1970 is worth noting. When the Ministry of Planning was established in 1965, taking away some of the Finance Ministry functions, there was a similar development about a year before in the United Kingdom. Harold Wilson, the Prime Minister of the UK established a Ministry of Economic Affairs under the Deputy Prime Minister George Brown, with the aim of generating "creative tension" in the management of economic affairs and enabling the "short termism" of the treasury to be counteracted by a more long term view of the new ministry.

What happened in Ceylon in 1965 was something similar. In 1970 when a new Ministry of Public Administrations was created, removing from the treasury its establishment functions and the responsibility for the public service, the UK had introduced a similar innovation by creating the Civil Service Department to manage the public service. Did these developments in the UK have an effect on local thinking? Or was it coincidence?

Since 1977, the market economy has been the main factor in determining economic growth. The role of the state has diminished, while that of the private sector has increased. There is a more open, liberal economy. The size of the economy has grown from about US dollars 4 to 5 billion in the early 1970s to about US dollars 60 billion in 2011 (in current dollars.) The share of public expenditures, like in most other countries, is between 40 and 50 percent of Gross Domestic Product (GDP). That would mean that government expenditures are about US dollars 30 billion.

It is vital that this expenditure is efficiently managed and the best returns obtained. Have we in this country established any system of priorities for public expenditures? To manage these huge public resources, there is need for some kind of planning. A central planning body enables the development of sophisticated technical capacities to manage the market economy and see through short term volatility and establish long term growth paths and social equity. There is a striking gap in this regard within the machinery of government. Although it might not be a planning ministry again, some kind of body with a vision for the medium term appears imperative.

(Leelananda De Silva was Senior Assistant Secretary and Director, Economic Affairs of the Ministry of Planning and Economic Affairs, 1970 - 1977)